A good friend whose opinion I respect wrote a comment that deserves space in the front page.
My only additional point is that he has been saying these EXACT same things for more than 6 months now...
Ektoras Wrote:
This is just the beginning. I believe US will get out of the recession much faster than Europe. This will take at least 3-5 years. Europe will face a longer but milder recession. Unfortunately the New Europe dream is under attack. The FDIs are going to die, Inflation will increase by at least 15% in most of these countries, growth won't be around for many years and people will keep living under panic. Major Banks are going to fail since the financial system is COMPLETELY OUT OF BUSINESS. More or less the same goes for Europe. The only -but vital- difference is that Europe has a strong social, politic and economic structure.
Banks are out of business. You don't have to be a nuclear scientist to get it...You buy high you sell low...what follows next? Bankruptcy.
The only reason people believe that the system won't collapse is because they cannot imagine what follows next. It is impossible for people to imagine a second great depression even though they have read about it in the past.
On the political grounds now, New Liberals should be punished. New Liberals would include the republicans in the US, the imposers of the "dead end" economic policies in Italy, the populist right representatives in Greece, the national social right politicians in Poland, the liberals in Germany and so many others.. They should not be punished for imposing their thoughts. They should be punished because they were arrogant.
On the financial grounds, humanity, initially, needs to see how to get over the crisis and then punish all the "useless, arrogant, short sighted and constantly conspiring" finance people. Everybody in the market knew what was about to follow BUT nobody was strong enough to admit it..Maybe this is because everybody would reveal the secret after the bonus payment.. How short sight policy..
Even the entry level employers were chosen under doubtful criteria. These are things that people should expect when the system blindly trusts "top university" alumnus. Alumnus who have never been tested for their global views and entrepreneurship mentality they ought to have. Introducing so many quant people in the system would lead to these results. The economy needs economists and people who are in position to explain what the F**k is "inflation", “growth” and “stagflation”.
The irony of the whole story is that moderate people, Keynes supporters and people who used to believe in the European fundamentals of social governments, workers rights, Unions, moderate monetary policies were criticized as inadequate..Now they are here to save the New Liberal politics.. “Socialism saves Capitalism”…what an irony
Thursday, October 23, 2008
Comment By Ektoras
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2 comments:
OK cool....first of all congrats for the wonderful blog and I would love to hear more analysis from individuals like Ektoras. Ektoras makes his/her conclusions quite clear and portrays them vividly.
Now to the point. I would like to criticise the post by Ektoras on the grounds that it is itself subject to two great fallacies. The fallacy of arguying by concluding without illustrating the premises (a.k.a the analysis) that lead to those conclusions. Of course everyone who writes something exposes him/herself to criticism and it is easy to be the critic rather than the author. Still I will try and portray my reasoning behind my criticisms and as such expose myself as well.
This is just the beginning. I believe US will get out of the recession much faster than Europe. This will take at least 3-5 years. Europe will face a longer but milder recession. Unfortunately the New Europe dream is under attack. The FDIs are going to die, Inflation will increase by at least 15% in most of these countries, growth won't be around for many years and people will keep living under panic.
All the above present us with conclusions and no analysis...forecasting on what will happen without explaining why...
From the above quote I keep that Europe is in worst situation than the US. Let me try and refute that. First of all the whole financial system is interconnected through economies that borrow and consume (US and UK for example) and others that work and sell and have cash reserves on a given currency (China and India for example).
What this means is that someone makes something and the other buys that, if the other cannot buy they either stop buying or borrow from the buyers (put it on the tab kinda style). The borrowing transaction is in a given currency (e.g. dollars) and if the borrower decided to keep it in dollars its fine (no drama) but if they decide to change it (to Chinese Renminbi for example) that then means that they sell the dollars they have been paid to and buy Renminbi causing the dollar to depreciate and the Renminbi to appreciate.
Now this becomes important after we see the diversification of portfolios that the 'producing' countries have (i.e. do they keep all their reserves in Dollars or do they buy other currency as well) now we know that China has its vast reserves in Dollars and Euros (and that is the reason most say that the Renmimbi is artificially kept at low levels to increase buying) so the Chinese are pretty much in a bad state since the money they have buys less in the global economy. Then again since in the falling economies that use the dollar or euro, everything is dropping in price (specifically stocks) the Chinese can buy US and Euro companies at a beat down price without being affected by the drop of the dollar that much. This means that the US and Euro companies will rise again but a good deal of it will be under different ownership (of course not complete ownership but partial).
Why is this important the wise one may ask?? And this is the point where policy comes in. US has in the past been notoriously resistant to ‘selling off’ US companies to another country. This simply translates in that, yes US companies will remain US owned but it will take them much more to recover since the foreign direct investment will be more difficult to make.
Now my argument as to why Europe is better off than the US goes to the fundamentals. My premises are the following:
---Emerging economies Russia, China and India pick up on knowledge (developing own GPS-landing on moon-sending missile to space)
---Europe much less dependent on non renewable energy (largest renewable energy producer in world).
---German (and Eurozone based )banks much better capitalized than US banks. Compare the German three layer banking system with that of the US (no bank can be just investment bank). And producing arguments for the Swiss IB’s does not hold since what I am talking about here is the fundamentals and not ‘fake money’ (i.e. money based on debt)
---US decaying infrastructure
---US deficit off the charts (even more with the bailout plans)
---Iraq war is actually projected to make a loss rather than an oil-based profit
---US culture based on immense oil and overall consumption (produces 3% of world oil and consumes 25%--driving a 6 litre pick-up truck to work is seen as a ‘right’ of the American people and not as a privilege)
---UK based on financial industry is screwed.
---Sentiment of world in respect to the US a lot worse now than 8 years ago (compare Bush going to war while UN voted NO with the UN standing ovation to Bill Clinton when leaving office—first for any US president in the history). Nobody likes doing business with people-organisations-countries they don’t like. Japan’s economy was allowed to fail but not the US and UK...???
---New (enlarged) Europe can combine strong capital (Germany, France, Nordic countries—as of standing the Eurozone economy combined is the largest in the world http://en.wikipedia.org/wiki/Eurozone and this is excluding UK) with a knowledge based expansion (Germany, UK, France--new technologies, innovation in every aspect) and the benefits of a renewable energy based energy supply WITH the cheap (temporarily but still...) labour of the emerging economies in the enlarged Europe (Hungary, Bulgaria, Czech Rep etc).Also emerging economies invest heavily on knowledge and innovation.
On the depression issue.
Last depression (1929) is fundamentally different both in structure (interconnected economies) and policy (in 1929 banks WERE ALLOWED TO FAIL). For this I refer to Stiglitz’s (nobel in economics in 2001) interview on BBC few weeks ago—can’t find it to post the link but you can find out more about that if you read the views of Stiglitz on this matter.
On the political grounds.
Politicians all over should be hanged for not allowing the banks to fail. Communism (along with other socio-economico-political) systems failed not because it is a bad idea...it is a great idea but it failed on implementation (quoted by MIT’s Lester Thurow on leadership speech given in Athens 2000—video is available if you buy me drinks). Its exactly the same with what we experience now with capitalism...an idea that seems to work but is being implemented very badly by the politicians. Every system is based on an ideology and view of the world and human nature. The form of capitalism we are experiencing now has long digressed from the original ideology.
Since we elect our politicians I think we deserve the situation we currently are. Especially if we think how irresponsibly some of us vote ( I met a Californian guy in Indianapolis who is not voting for Obama because he says he will be assassinated and he is fanatical about McCain because he is old and he will soon die and he wants to see a hot woman—referring to Palin-- be in office!!!)
On financial grounds.
I totally agree with most of the parts that Ektoras puts forward EXCEPT with the notion that everybody knew and they did nothing. And by ‘everybody’ I interpret Ektoras’s target group that everybody in the market (i.e. financial industry). To quote :” On the financial grounds, humanity, initially, needs to see how to get over the crisis and then punish all the "useless, arrogant, short sighted and constantly conspiring" finance people. Everybody in the market knew what was about to follow BUT nobody was strong enough to admit it.. “
Lets consider the following: What is the (real) purpose of an IB banker? To make investments and make money. All the bankers did exactly that!! It is (was) not their responsibility to take care of economies...since the politicians allowed them to do it damn me they were extremely clever to do what they did. And that is my point...they knew..they knew that they are too big to fail, they knew from the previous crises that they will be bailed out and the taxpayer would pay for that. That was the best deal ever (heard of moral hazard)!!!
And they took action screwing us pretty good all over. Few hundreds of bankers had the rest of the world essentially paying for their huge bonuses. And you know what...nobody can blame them. They did their homework and took the most profitable route. And they were damn good at it!!!
With hindsight everybody is 20/20 on what went wrong and why...the point is that nobody (meaning a non banker) did anything about it and as much as we shout they have pocketed the money and we have been handed the bill.
I could keep on going but I passed 1500 words and I need to drive 8 hours from Tennessee to Urbana overnight (guess being a trucker is a safe profession to be currently ).
I would be glad to read other contributors on the above points.
Nikolas, what is your opinion?
Once more congrats on the fantastic blog and get more of your friends to post thought provocative comments here.
“Stop bitching, start a revolution” (read it on a t-shirt in Washington and I really think this is a contemporary thought.
‘I made a mistake,’ admits Greenspan
Alan Greenspan, the former US Fed chairman, said the credit crisis had exceeded anything he had imagined and admitted he was wrong to think that banks would protect themselves from financial market chaos. More…
Alan Greenspan, the former US Fed chairman, said the credit crisis had exceeded anything he had imagined and admitted he was wrong to think that banks would protect themselves from financial market chaos. In the second of two days of Capitol Hill hearings, he accepted that the crisis had “found a flaw” in his thinking but said that the kind of heavy regulation that could have prevented it would have damaged US economic growth. In the same hearing, SEC head Christopher Cox said he strongly supports merging his agency with the Commodity Futures Trading Commission, the WSJ reports.
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